In the introduction to our Demystifying Private Investments article series, we defined private markets, established who is eligible to make private investments, and how those investments are accessed.  This second article focuses on what private investments hope to achieve within your portfolio.

 

The Biggest Advantages of Private Markets Aren’t Just Their Returns

The largest staple of any strong portfolio is asset allocation; finding unrelated return streams within a portfolio is crucial to long-term success. In other words, the whole portfolio can suffer under the weight of one poor decision when investments are not properly diversified.  But you can only take diversification so far when all your investments are made within the public market universe.

Private investments are fascinating because their returns are often uncorrelated to public markets.  Many areas of your portfolio can take a hit during a down period of the stock market, but your private investments are not tied to that relative short-term activity.  Because there are longer holds within private investment funds – typically anywhere from five to ten years – the funds can weather the storm of panic-driven selloffs more easily than public investments tend to.

As we all try to create more income within our portfolios in this low yield environment, private investments are being looked to as somewhat of a hybrid alternative to stocks and bonds.  Private investments are less volatile than stocks and come with the potential for higher investment returns than the bonds usually looked to for stability.  Intrigued by these properties, sophisticated investors are now allocating anywhere from 5 to 20% of their portfolios to private investments.

This trend can be seen in institutional investors such as endowments, pension funds, and sovereign wealth funds which have increased their exposure to private markets from 3.8% to 6.3% since the Global Financial Crisis of 2009[1]. A main driver of this increase in private markets can be seen in the biggest player in the space – buyout funds – which make up almost one-third of the overall private market universe.  We will talk more about private equity and buyout funds a little later in the series.

Now that we understand the valuable diversification private markets can potentially add to your investments, let’s look at what the different segments of the private markets aim to specifically accomplish within your portfolio:

 

 

While most people think that private investments are focused on the bottom two forms of private equity – buyout funds and venture capital – you can clearly see in the chart above that whatever the goal is of your investment strategy, there is a private asset class available to address it.

 

Conclusion

We have established that there can be distinct benefits to including private markets in your overall portfolio allocation to attain valuable diversification, and that each asset class can have a specific objective within your portfolio.

Next up in the series:

Starting with the private equity world of buyout funds and venture capital, we will explore each private market asset class in depth in the next two articles and how they correlate to what you aim to specially accomplish in your portfolio. CLICK HERE to access the next article in the series.

 

CITATIONS

1. [1] https://seekingalpha.com/article/4389099-private-markets-diversifying-for-future